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Darwin ProfessionalUnderwriters, Inc.2007 Annual Report
EVERY STEPWE TAKE.
A cautionary tale
WE’RESCRUTINIZINGDETAILS. WE’REEXAMININGDATA. WE LIVEBY OUR WITS AND GROW BYOUR SPEED –SERVING OURMARKETS AND GETTING IT RIGHT.DARWINPROFESSIONALUNDERWRITERS2007 YEAR INREVIEW
Darwin has worked hard to earn its reputation as a dynamicforce for innovation in thespecialty insurance space.For the past five years we’ve set a hectic pace: adding tocoverage offerings, augmentingdistribution channels, anddiversifying our book. This isentrepreneurship at work,supported by a suite of high-tech tools and infused with the pure exuberance of ouremployees. Given all that, caution may not be top of mindwhen thinking about Darwin and the attributes that make usgo. But put caution on your list.
Know that diligent foresightplays its own very critical role in moving our businessforward over the long term – as important as the roles that energy and speed alwaysplay. Darwin is searching for new ways to expand itsfranchise. Pricing cycles and new liabilities make for perilous underwritingconditions in the markets we compete in. This can betreacherous terrain at times,but we venture forward just as fast as caution permits.
To Our Stockholders
We’ve all heard the phrase cautious optimism. It describes a mindset that keeps you moving confidently toward your goals, yet always ready to deal with the unexpected. That attitude permeates everything we dohere at Darwin, where optimism and caution are woven together in ourDNA. It’s one of the reasons we chose to highlight themes of preparedness and purpose in this year’s report – to illustrate that, although caution is vital in our industry, it never means we stand still. Our dynamicmarketplace demands that we be vigilant for the next new growthopportunity – ready to assess its value, willing to find a fit, and able toclose on the winners or to take a pass if the returns we seek aren’t there.
Darwin witnessed a number of milestone achievements andsuccesses last year. We’re especially proud of the $280.3 million ingross premiums written in 2007, a 13.8% increase over the prior year’sfigure. This is meaningful top-line growth, and we achieved it in theface of two increasingly formidable obstacles: mathematics and themarketplace. Math makes us victims of success, as our expectation for year-over-year growth translates into ever-larger amounts of newpremium dollars. The bar moves up quickly for a young company, andlately it’s been rising in the context of a fiercely competitive and price-sensitive market. I salute our staff for the collective effort that allowedus again in 2007 to achieve a new high for premiums written despitethe hurdles. So far, so good, but no one believes we’ve ferreted out the world’s last $280 million of profitable specialty business. There’smore out there, and we’re on its trail.
Top-line improvement isn’t the only financial measure by whichsuccess during 2007 can be judged. In fact, if the business isn’tprofitable, it’s a poor judge. Growth must come with an unwaveringcommitment to maintaining the high quality of our insurance riskportfolio. In fact, what the 2007 results demonstrate is that the qualityof our risk portfolio is being well preserved, as evidenced by our 56%loss ratio and 84% combined ratio, each more than ten points below thecorresponding ratio in the prior year. Growing premiums and disciplinedunderwriting pay off at the bottom line. In posting $1.89 net earningsper share this year, we essentially doubled our 2006 EPS of $0.95, andmore than quadrupled the 2005 EPS of $0.46. Our return on averageequity was 13.7% for 2007, a significant increase over last year’s 7.7% return on average equity. Book value per share rose more than16.8%, from $12.78 at the end of 2006 to $14.93 a year later.
Among Darwin’s non-financial successes and accomplishmentsduring 2007, some of the more notable are mentioned below:
In April, trading in our common stock moved from the NYSE Arca (anincubator exchange for smaller, newer listings) to the NYSE. Darwin’swas the first such issue to “graduate” from Arca to the Big Board.
We saw tremendous strides during the year toward making ourproprietary (i-bind) ® technology an even faster, more straightforward,and more intuitive interface for our brokers. This award-winningapplication now offers a streamlined insurance application, binding, andpolicy issuance process for more than 300 new lines of miscellaneousE&O coverage.
Darwin’s staff has grown steadily, and at year-end 2007 our staff countstood at about 140 employees, up more than 20% from the prior year-end.
Stephen Sills
book valueper share*
return on average equity
combinedratio
99.9
%
04 05 06 07 04 05 06 07 04 05 06 07
97.3
%
94.3
%
84.1
%
0.3%
3.2%
7.7%
13.7
%
$1.9
1
$11.
30
$12.
78 $1
4.93
2007 gross premiums written by line
50%errors &
omissions
*Ass
umes
sto
ck-s
plit
effe
ctiv
e fo
r all
perio
ds.
0.2%generalliability
13.8%directors & officers
36%medical
malpractice
financial : : highlights These graphs depictcautious optimism at work both in our businessmix and our financial results. The grosspremiums written chart illustrates Darwin’sdiverse book of business. The other graphsrepresent strong progress in metrics thatsupport Darwin’s growing intrinsic value.
In a related development, Darwin was named one of the “best places to work in Connecticut” in March, an award based entirely on employeeresponses to an anonymous online survey of the Hartford BusinessJournal. Attracting talent is a critical success factor for us, and we strivefor a culture where people want to come to work and build their careers.The “best places” award is one more indication that we’re succeeding.
Last, but not least, Darwin’s in-house band D7, went all the way tothe regional semi-finals in the Battle of the Corporate Bands, an eventstaged annually by Fortune Magazine and the Rock ‘n Roll Hall of Fame.
We celebrated our fifth anniversary this quarter. Darwin has mademeaningful progress during that span. As important, we’ve been able to avoid material harm from recent liability calamities, like optionsbackdating and the sub-prime credit meltdown. Such exposures werenot even on the industry’s radar screens only a few years ago. The sub-prime issue, in particular, could have a substantial impact on thespecialty landscape in 2008. We’ll be positioned to take advantage of whatever opportunities shake out as our peers deal with thesedevelopments during the coming year. More than that, we’ll keepdeveloping strategies and disciplines and technology that will help us thrive regardless of prevailing market conditions.
Stephen SillsChairman, President, and Chief Executive OfficerMarch 2008
READY TO
FLOATREADY TO
ST ING
Consistent, long-term growth in the Darwin franchise value is our goal. It means increasedwritings, of course, but everynew dollar of Darwin premiumis a dollar less that someoneelse writes. And our competitorsdon’t cede market share withouta fight. With our price-to-the-risk philosophy, strong brokerrelationships, and constantprobing for unserved “loose-brick” niches in our markets, the plan in Darwin’s corner is to be smarter and quicker to the punch in finding sources ofnew revenue. However, what’strue in the ring is often true in
business. Getting larger won’tguarantee our success, at leastnot by itself. Beyond increasingsize and scale, we’ll needstamina, superior footwork, and a competitive spirit if wewant to go the distance. Darwinrelies on enhanced coverageterms, producer-friendlyapplications, and a best-in-classloss control staff to compete for new business with above-average profit potential. Thatfuels growth where it counts… at the bottom line. Training our eyes on profitable growthmeans Darwin will never be left hanging on the ropes.
hanging : : tough With Edmund Hillary’s passing early this year, we werereminded again of the incredible stamina, daring, and ingenuity he and his teamdisplayed during their 1953 assault on Everest. It’s clear that, even in centralConnecticut’s flatlands, those same qualities will be needed if we are to achieveextraordinary results in the harsh conditions of a soft market. Darwin’s team of insurance professionals has set its sights on lofty goals: We’ll continue tomake customer-oriented processes – like short-form policy applications andunmatched risk-management support – an essential part of the Darwin product.We’ll become the go-to provider for producers, holding ourselves to the higheststandards for customer service and satisfaction. Our staff of skilled, responsiveclaims professionals will become a differentiating factor in our markets. And,the accountants, actuaries, attorneys, tech experts, and others who support theoverall effort will treat every Darwin teammate as a customer.
Not least, we will adapt tactics to suit the conditions we encounter on our climb. Mountaineers always start with a plan to achieve their goal. Theyknow that, while the goal will remain fixed, the plan will often have to change.They’ve learned that the way to the top of a great mountain is rarely very fast, and it’s never straight. Without proper caution, however, the way to thebottom can be both.
P L A N : Behind every successfuladventure is a smart plan of attack –a knowledge of where you are goingand what it will take to get there.
A C H I E V E : Goal reached, review andassess. Where do we go from here?How rocky was the process? What canwe do to make it a better experience?
A D A P T: To achieve highergoals, you sometimes have toreevaluate and approach from a different angle.
built : : to scale You’ll often hear us sum up the company’s strategic directionwith the motto: “Darwin is getting big by getting small.” This is no paradox. It’sour conviction that a product and service superstructure that facilitates writingsmall and mid-sized accounts is best-suited to support our growth. Althoughlarger accounts will have their place within Darwin, obtaining an adequate returnfor our capital put at risk on “household name” accounts is becoming increasinglydifficult. Thus, we’ve developed an architectural bias toward insurance policiesand distribution methods that increase our appeal to smaller entities. Examples of this include our new multi-coverage solution for small managed careorganizations and the recent improvements to our proprietary (i-bind) ® web-based quoting and binding tool. As Darwin’s revenues continue to migrate toward a higher number of smaller and mid-sized premium accounts, we expect to see increased renewal rates and greater stability in our pricing over time.
This strategic vision is possible only because Darwin can bring extraordinaryoperating efficiencies to bear in each policy’s placement. From Day One, ourbusiness processes and technologies have been designed to get new coveragesolutions to the market as quickly and cost-effectively as possible. Yet, ascritical as today’s efficiencies may be, it is equally vital that Darwin neversacrifice long-term flexibility. We’re cautious to create tools that are highlyscalable – keeping pace with new demands as tomorrow’s opportunities arise.
Opportunities
innocence : : lost Cautious? Yes. Vigilant? Great. But how can you know you’re watching for the right thing? That’s where the experience of Darwin’s risk-management professionals provides such a valuable edge. It’s our job to help insureds recognize where their liability risks reside. Risk professionalsunderstand that the least suspicious circumstance may demand the mostattention. Our insureds often deal with the well-known threats to their financial health. They may be less aware of all those seemingly benign daily events that often carry potential for even greater peril. (It could be thehospital administrator who has a laptop full of unencrypted patient data stolen from her trunk.)
In the risk business, it’s prudent to remember that even a harmless piece of fruit has its dark side. Darwin succeeds by combining risk-transfer and risk-management solutions that address the full spectrum of our customers’ liabilityexposures – from news-making legal issues down to the most pedestrianweakness, where a slip-up can still be plenty painful.
Funny how such seeminglyinsignificant things cantotally slip you up.
NO NONSENSE
risk : : relevant Whether it’s goals-against average or style points you care most about, risk management is never a one-size-fits-all affair. Liability protection that makes sense for a Fortune 500 board member is dramatically different from what might best fit the needs of a small
publishing house. And, beyond simply the amount of coverage purchased, each insured will have specific coverage needs that Darwin’s underwriters can address with customized language – a policy that will dress our insureds for success.
STYLE & SENSE
more trial : : less error The entrepreneurial spirit has a special place in ournation’s history. For more than two centuries, it has been the dynamic force withinour free market system, energizing the economy and driving individual successes.
Authentic entrepreneurship is a thoughtful endeavor, even a cautious one.Risk taking without doing the work – gathering the information and testing theassumptions – is mere speculation. At Darwin, we never fall in love with an
fig. 1 - Prudent.
opportunity. Every new prospect goes through a full and rigorous vetting processbefore we plunge in. Even after we dive, the depth and temperature of the poolis still being validated. Any buyer of specialty insurance should expect no lessdiscipline of itself when deciding how it will transfer liability risk – and to whom.Waiting until there’s a large claim that needs to be paid is no time to beginasking whether the policy you’ve purchased will cushion the impact.
fig. 2 - Gonna leave a mark.
safe : : landings For decades after its invention, the parachute shared anessential attribute with insurance: each product was purchased in the sincerehope that it would never have to be used. Skydiving changed that, of course. Even today, whether drawn by thrill or driven by crisis, men and women about to step into an ocean of air are likely to consider the chute-packer’s diligence –the rigor of their rigger, if you will – to be a priority issue. For many of thebusinesses and professionals Darwin insures, making a liability claim can be a lot like reaching for the rip cord. Financial survival could depend on theirpolicy’s coverage deploying quickly and completely. Our caution means wespend the time it takes to craft policy language that will provide the coveragesour customers need while always shielding Darwin’s own capital and capacityfrom the law of unintended consequences. We pack our policies with protectionsthat will operate as promised. It’s serious business.
We prefer to spell it R-I-G-O-R.
TheMESSED-UP BEYOND
HUMAN COMPREHENSION( we’re talking corruption, malpractice, all sorts of
indiscretions, boldface crime, lawsuits, litigation, anda very long list of other assorted unpleasantries )
Survival Handbook
By Ben Thayer and Don ZhattAuthors of Struggling to Exit a Wood Pulp Sack
WHO PACKSWHO PACKSWhen no excuse can sufficeand “second chance” has no meaning, then expertise,caution, and attention to detailbeat discount pricing and name recognition. Every time.
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YOUR CHUTE?YOUR CHUTE?
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pack : : smart Business entities, professional firms, nonprofits, municipal agencies – all have assets and all are exposed to risk. Living through – even thriving in – thepotentially deadly liability environment you encounter in 21st century America requires careful forethought in preparingyour survival kit. Be sure to recognize that even the mostfrivolous claim can pose a serious threat to your financialwell-being. One often-overlooked peril here is the costlybleeding that must be endured while a claim against you is pending – the long and sometimes fatal practice known as “litigation.”
Your survival plan is a two-step affair. First, using the matrixto the right, carefully assess your organization’s liability riskprofile. (Note: You’ll find that there are many well-qualifiedinsurance brokers who can assist you in this.) Second, packsmart: obtain the Darwin product whose coverages best meetyour needs. Working with your broker and Darwin can helpensure your surviving even the worst case scenario. And, inaddition to insurance coverage, Darwin offers valuable risk-management services.
s u r v i v a l q u i z a n s w e r
MEDICAL PROFESSIONAL In the medical malpractice sector, the complexity of riskrequires an insurer to possess an intimate understanding of each insured organiza-tion’s operations and areas of exposure. Like medical care, we approach medical risk with a “life cycle” mentality, addressing it completely from start to finish.
ERRORS & OMISSIONS Professional liability. Darwin looks to underwrite specific niches within the professional liability marketplace. We go where we can make a difference, crafting coverage and terms that are as unique as the risks we insure – from solo practitioners to the largest professional services firms.
DIRECTORS & OFF ICERS Literally, every organization that has any type of managementstructure and board of directors needs D&O liability coverage. It may be more importantthan a strategic business plan. For profit, not-for-profit, publicly traded, or privatelyheld, necessity dictates D&O coverage.
TECHNOLOGY & NETWORK SECURITY As markets mature and adapt to survive, so doesrisk. Technology and network security risks are no longer limited to companies in thetechnology sector. Today, in every industry, personally identifiable, confidential data isat risk. With the right coverage, a hacker’s day at the breach doesn’t look so sunny.
SPECIALTY PROGRAMS Across each of Darwin’s lines of business we search for partnerships with key producers who possess intimate knowledge of niche segments.Program partnerships are an integral part of our distribution strategies. Darwin is programmed for specialty programs.
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2008 Product Guide
cross : : training Competitive drive and enthusiasm are key cultural traits at Darwin. Many of us give our all at the annual all-employee dodge-balltournament. A few rock hard in the Battle of the Corporate Bands; others shootit out with each other during pre-work, dawn’s light golf matches; still othersput their intellects on the line at the charity spelling bee. We all question oneanother, we push ourselves to rethink assumptions, to take a second look atpolicy language, or to reconfigure an obsolete procedure. Darwin’s employeesshow little reverence for hierarchy, and even less for status quo.
If none of that sounds much like caution, then you haven’t been listening.The danger we guard against is complacency. Darwin’s caution lies in thecommitment we share to plan well for the race we’re engaged in, to run hardand to respond fast.
Our employees are named within Darwin’s sign of progress at the left.Cautious optimists that we are, we’ll heed the rule we learned as kids – “stop, look, and listen” – and then we’ll run.
c o r p o r a t e c u l t u r e
SENIOR MANAGEMENT
Robert AsensioTechnology
Paul Martin FCAS, MAAAActuarial
David NewmanUnderwriting
Paul RomanoUnderwriting
Mark RosenClaims/Legal
Jack SennottFinance
Stephen SillsFounder
BOARD OF DIRECTORS
R. Bruce Albro 1, 3Consultant ( Investment and Financial Services)Former Vice President-Portfolio Client StrategyGen Re-New England Asset Management
Phillip N. Ben-Zvi 1Consultant ( Insurance and Financial Services)Former PartnerPricewaterhouseCoopers LLP
Christopher K. DalrympleVice President, Associate General Counsel and Assistant SecretaryAlleghany Corporation
Weston M. Hicks 2, 3President and Chief Executive OfficerAlleghany Corporation
William C. Popik, MD 2Former Chief Medical OfficerAetna, Inc.
George M. Reider, Jr. 2Consultant ( Insurance)Former Insurance CommissionerState of Connecticut
Jack Sennott 3Senior Vice President and Chief Financial OfficerDarwin Professional Underwriters, Inc.
Stephen SillsChairman, President, and Chief Executive OfficerDarwin Professional Underwriters, Inc.
James P. SlatterySenior Vice President, InsuranceAlleghany Corporation
Irving B. Yoskowitz 1, 2Executive Vice President and General CounselConstellation Energy
1 Audit Committee 2 Compensation Committee 3 Finance and Investment Committee
l e a d e r s h i p
Corporate HeadquartersDarwin Professional Underwriters, Inc.9 Farm Springs RoadFarmington, CT 06032v 860 284 1300e [email protected]
On the InternetCorporate, product, and investor information,including corporate governance documents,news releases, financial filings, and stockquotes, are available at our website:www.darwinpro.com
Investor RelationsJack Sennott, SVP and CFOv 860 284 1918e [email protected]
Media InquiriesDrake Manning, AVP and Directorof Corporate Communicationsv 860 284 1500e [email protected]
Stock Transfer AgentComputershare Investor ServicesP.O. Box 43078Providence, RI 02940-3078v 312 588 4990e [email protected]
10-K ReportA copy of the company’s 2007 annual report onForm 10-K is available without charge via thecompany’s website or by requesting a copy fromthe investor relations contact named above.
Executive CertificationsThe company submitted an unqualifiedcertification to the NYSE in 2007 regarding the company’s compliance with the NYSE’scorporate governance listing standards. Thecompany also filed with the SEC, as exhibits toits 2007 Form 10-K, certifications under Section302 of the Sarbanes-Oxley Act of 2002, signedby the Chief Executive Officer and the ChiefFinancial Officer.
Stock ListingThe company’s common stock is traded on theNYSE under the symbol “DR.”
Independent Registered Public Accounting FirmKPMG LLPHartford, CT
Forward-Looking StatementsThis annual report contains forward-lookingstatements that are based on the company’scurrent expectations and are subject to risk anduncertainty. Reference is made to the “RiskFactors” in the company’s report on Form 10-Kfor the year ended December 31, 2007, fordiscussion of certain factors that may causeactual results to differ materially from thoseset forth in the forward-looking statements.
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We’ll be watching (out for) you.
www.darwinpro.com
Darwin Professional Underwriters, Inc.
9 Farm Springs RoadFarmington, CT 06032
v 860 284 1300e [email protected]